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Blair warns of Tory budget axe

Universities would have their budgets cut by almost a quarter under Conservative spending plans, prime minister Tony Blair told The THES this week.

Mr Blair said it would be impossible for the Conservative Party to honour its manifesto promise to cut income tax by trimming £8 billion from public spending unless it slashed the higher education budget.

The prime minister said: "Tory plans are divisive, uncosted and impractical. They would cut £1.3 billion from higher education, open the way for university top-up fees and force students to take out commercial loans."

He added: "Tory plans to privatise university funding have been independently estimated (by Universities UK) to cost £101 billion, yet Michael Portillo admitted last week that he could not explain where the money would come from. Instead, the Tories say they will cut £1.3 billion from the higher education budget."

The Tory manifesto claims that the higher education savings would be made by endowing universities. The party has said that this could mean lump sums of perhaps £1 billion for a large university.

The Conservatives say that endowed universities would invest their lump sums to generate an annual income for teaching. Then there would be no need for the state to fund teaching in these institutions.

But Mr Blair showed Labour Party calculations, backed by independent actuarial advice, that indicate that the Conservatives would have to raise £32 billion upfront to endow enough universities to make the £1.3 billion saving promised.

The Labour figures are based on universities achieving a 4 per cent net return on their invested endowments - £1.3 billion being 4 per cent of £32 billion.

Actuarial advice received by the Labour Party shows that universities would have to secure gross returns of at least 6 per cent on their endowments. This is unlikely in the current market with low interest rates, according to Labour's financial advisers.

Out of these gross returns, according to Labour, universities would have to plough 2 or 3 per cent back into their endowment capital to maintain its value.

Labour claims it would be impossible for a Conservative government to find the £32 billion it would require in its first term. Instead, it would be faced with a choice between missing its manifesto pledge to cut taxes or making the £8 billion savings regardless.

There is also the problem that as privatised institutions raising their own money for teaching, endowed universities would be able to charge what they liked for tuition.

Shadow education secretary Theresa May said that Mr Blair's attack was based on a misunderstanding of the endowment policy, or was deliberate scare-mongering. The Conservatives say that £3.5 billion would be available for endowments very quickly by selling student debt to the private sector. Thereafter, additional cash for endowments would be available because loan debt is sold annually, generating some £1.6 billion by the party's calculations.

About £700 million of the £1.3 billion would come from selling the loan book. To make this saleable, the Tories propose to charge a real rate of interest of perhaps 5 per cent above inflation.

The remainder of the £1.3 billion would come from the endowment process via Treasury savings thanks to resource accounting and budgeting (RAB), a new method of accounting for government spending and investment.

RAB would allow the Treasury to reduce the national debt by about £600 million annually once universities start to be endowed. The Conservatives say that these savings do not rely on a specific number of endowments. They add that universities will get a higher return on the cash than the government could, allowing a further reduction in public spending.

The Conservatives have suggested that more endowment money could become available from the sale of publicly owned telecommunications bands.

Ms May said: "Our policy will ensure that universities have the freedom to develop as world-renowned centres of excellence. It will also ensure that universities are not dependent on the goodwill of government for their funding. Our policy was identified as one of the four options for future funding of the sector by Universities UK."